'The fox knows many things…'

i3 Insights: Making Weight – How Super Funds Can Play the Rating Game

We’ve probably all seen the spectacle of a pre-fight weigh-in on TV. Boxers strut and trash-talk each other, while sometimes the theatrics turn into a brawl with trainers and supporters also getting into the action.

Notwithstanding the histrionics, there is also serious side to the weigh-in. Fighters will often ‘cut weight’ coming into a weigh-in, involving rapid weight loss prior to competition. Boxers dehydrate themselves in order to compete within a specific weight class. Individuals can lose up to 15 kilograms within a 48-hour period.

In a professional bout, after weigh-ins, fighters are given 24 hours to rehydrate before the competition. This means that a fighter weighing in at 75kg on Friday could show up to the Saturday fight weighing 85 or 90kg.

These tactics can give a fighter a huge advantage on fight night. When fighters cut weight, they do so in order to gain a size advantage over their opponent. In the realm of professional fighting, size does matter. The bigger you are, the harder you hit, the harder you are to hit, and the more your attacks exhaust your opponent. The fighter who masters how to effectively cut weight will always have the upper hand.

Benchmarks and Incentives

The weight class system creates an incentive for boxers to engage in gamesmanship such as cutting weight. In a similar way, might a focus on peer relative returns incentivise a superannuation fund to engage in a form of weight cutting tactics? If so, how might they do it?

Before we answer these questions it’s worth thinking about incentives. Here’s what we know:

Historically, growth assets such as shares out-perform defensive assets such as bonds around 60-80 per cent of the time.

Competition is intensifying as the government and the regulator are keen to promote consolidation of the superannuation industry.

Like a boxer trying to make weight, super funds could be incentivised to run portfolios that pack as much punch as possible (i.e. highest weighting to growth assets) while still making the ‘Balanced’ weight division.

The pressure to ‘make weight’ would intensify as more and more funds adopt such tactics. Nobody wants to be slugging it out against a competitor that’s running a growth assets exposure that’s 10-20 per cent higher!

The result could be funds running riskier and riskier portfolios in an effort to ‘punch above their weight’. The incentives to do this would be even stronger if the variable compensation of super fund management depended on beating a peer benchmark…